Tax, legal and regulatory changes usually have a lengthy gestation period, and initiatives conceived by policy-makers can take many years to come to fruition. In the world of financial services regulation, that is usually a benefit: it allows time for measured judgements to take the place of knee-jerk reactions, and for the detail of complex rules to be thoroughly considered. So we shouldn't be surprised that responses to the financial crisis are still working their way through the system, while many measures designed to stimulate growth in the face of a deep European recession are still at the design stage. And a look back at our predictions for 2015 this time last year neatly illustrates why industry participants need to play the long game.
As we anticipated, much of the legislative change for private equity and venture capital executives in the last 12 months has been related to tax, and that will continue: the international crackdown on tax avoidance, led by the OECD, will throw up more challenges, and major changes to the tax treatment of cash received by individuals working in the UK are, to some extent, still a work in progress. The direction in both cases is quite clear, but the detail remains hazy and could be very damaging if not resolved in a sensible way.
Helpful regulatory developments have been slow: last year we anticipated more progress on the EU's Capital Markets Union than has been achieved, although a consultation on changes to the European venture capital funds regime could prove helpful (and the industry's response to that has been published last week). We also predicted more progress on a marketing passport for non-EU based private equity funds than we saw; it may be a forlorn hope to expect that to become a reality this year. And there are inevitable regulatory storm clouds still on the horizon: new rules on remuneration, for example, could yet be a major headache for the industry. In the UK, changes to limited partnership law did indeed gain momentum, as expected, but are still not on the statute book. Perhaps we might dare to predict that 2016 will be the year that those amendments are finally made.
But the slow and steady pace of legal change in Europe could be upset by a much bigger event this year: the referendum on the UK's membership of the EU. Fortunately, we didn't attempt to predict the result of the UK's general election last year, and the outcome of the UK's most important poll in decades could be every bit as unpredictable when it finally happens (which seems likely to be in 2016, although even that isn't clear). Of course, if the UK were to leave the EU the impact on the European private equity sector would be significant, and it certainly would not be business as usual in Britain or Brussels.
The effect on deals is reasonably clear: at the risk of over-simplification, whatever the long-term effect on the UK economy, a prolonged period of uncertainty would create headwinds for the growth and exit of existing UK investments, and significant uncertainty around potential new deals. As for the regulatory impact, that would be very largely determined by the terms of separation and the nature of any new relationship the UK was able to negotiate – which remains unknown. It might well be, for example, that the UK would opt to keep a lot of the regulations which have their origins in the EU – including perhaps the AIFMD – as the price for persuading other member states to allow it to retain access to the single market. There are, of course, precedents for that kind of arrangement: Norway is one, because it is a member of the EEA (though incorporating the AIFMD into the EEA Treaty has not been as smooth and rapid as some other Directives), while Switzerland and the Channel Islands seem to be in pole position to have access to the AIFMD third country passport when it is finally made available solely because they have agreed to similar rules. So a UK exit would probably not be de-regulatory for private equity, but would certainly give rise to even more compliance upheaval.
All in all, it wasn't hard to make predictions in January 2015: most of the policy initiatives we discussed were already in train. They have all progressed somewhat, but mostly remain on the legislative agenda as we enter 2016. But the biggest unknown, the UK's future as part of the EU, is likely to keep us all guessing for some time yet.